LBMA 2010: Back to the Future

The BIG MONEY flows from the biggest trends, of course. But even the
brightest people, and with the best of intentions, can struggle to see today
what hindsight will say you could have banked on.

By the summer of 1922, for instance, you needed 100 of Germany's paper Marks
to buy one gold coin Mark,
against which they were supposed to be equal. Yet the German Chancellor "would
[still] accept no connection between the printing of money and its depreciation," notes
Adam Ferguson in When Money Dies (London, 1975)...even as the Weimar
Republic's hyperinflation pushed Berlin food prices well over 50% higher inside
one month.

Indeed, "the opinion that the flood of paper is the real origin of the depreciation
[in its purchasing power] is not only wrong but dangerously wrong," said the Vossische
Zeitung newspaper. So by the time the worthless currency was abandoned
14 months later, it took one trillion paper Marks to buy one
golden equivalent, and German banks "turned the Marks over to junk dealers
by the ton" for recycling as scrap paper.

Who could've guessed?

Now, fast forward almost a century. Today the value of money (like its price
versus gold) is at issue once more, and missing the big trend - inflation or
deflation, commodities boom or depression - is a big worry for anyone serious
about defending their savings. Over the last decade, gold prices have scarcely
looked back in their rise from $252 to $1313 per ounce today. US equities,
in contrast, have gone precisely nowhere, while commodities have certainly
rallied, but hard assets (outside gold and silver) remain off their pre-Lehman
tops of 2008. Treasuries and cash-in-the-bank can barely keep up with inflation,
meantime, despite the official "core" US measure slipping below 1% per year.
Housing looks like the "double-dip recession" cast in concrete.

Edging above $1300 this week, therefore, it's little wonder that "Gold: Bubble
or boom?" was the big theme (both on-stage and off) at this year's London
Bullion Market Association conference, held in Berlin. Besides dealing
silver and the platinum-group metals, the LBMA's membership is the world's
wholesale gold market - the refiners, assayers, vault operators, dealers, financiers
and analysts who help move the metal from mine-head to retail production, whether
jewelry manufacturers, dental suppliers, chip fabricators or gold
coin mints. Very much centered in London (where the Association's biggest
bullion-bank members settle some $20 billion of gold trading between themselves
each day), this odd little corner of the financial market well remembers the
time before today's current rally...a miserable two-decade run of falling gold
prices, falling demand, and falling returns for the market's suppliers. And
no one wants to be late in seeing that the wind's changed direction.

"When I started in precious metals in the early '80s," said one head of metals
trading to the 500+ delegates on Tuesday morning, "I understood that private
clients would hold around 3% of their wealth in gold
bars and coin...But over the next 20 years, those reserves were really
liquidated, down to pretty much zero by 2000."

He's just added to his own personal gold holdings, he said, buying gold
bars first cast in 1980 for bank-teller sales to clients in the north-east
of England. Yet the vast bulk of attendees - whilst bullish in their average
$1450 price forecast for Sept. 2011, and with 60% believing gold would "perform
well" even if deflation hit - are a long way from fully invested. A question
thrown to the floor showed 74% of the bullion-market professionals meeting
in Berlin keep between 0% and 10% of their own private wealth in precious
metals. So either they're shills who lack the courage of their convictions,
or they prefer to separate where they keep their savings from where they
earn their income, or gold has yet to capture the real investment dollar
of even those people closest to it.

More broadly, current gold investment accounts for barely 0.5% of investable
wealth worldwide, as Shayne McGuire of the Texas teachers' pension fund (and
now author of two books urging Americans to Buy Gold Now) showed on
Monday, down from 3% in 1980 and far below the 5% of 1968 or 20% allocation
gold received prior to the mid 1930s.

Thanks to the massive growth of other investment choices, "Gold has never
played a smaller part in the global financial system than today," McGuire concluded,
and while further gains aren't guaranteed by the "weight of money argument" (as
Philip Klapwijk of GFMS called it) the relative lack of investor hoarding hardly
smacks of gold's being a bubble. And while the Western world's biggest central
banks hold huge quantities of the stuff, the world's biggest foreign exchange
holders are all "underweight gold by any measure" (Philip Klapwijk again),
with a growing desire at least to address their "overweight Dollars" position.

Indeed, "off-market" sales of gold
bullion by European and even perhaps - one day in the far future - the
US governments "may [in time] facilitatea transfer of bullion from West
to East" the GFMS chairman said, reminding delegates of the gold transferred
from the US to Europe to settle America's balance of payments debts in the
late 1950s and early '60s. Meantime emerging economies continue to buying
gold both "to diversify" their large US-Dollar holdings, and also as "catastrophe
insurance", and private investors have similarly seen "the world's markets
flooded with cheap money," said Germany refinery Heraeus's head of sales,
Wolfgang Wrzesniok-Rossbach. His detailed (and best-in-show) presentation
on gold bars, coins
and other retail-investment products Monday afternoon noted the surge in
European physical demand during the Greek deficit crisis of early 2010.

One driver is psychological, Wrzesniok-Rossbach said. Because "here in Germany,
there is a great desire for security. We are the most over-insured people in
the world." More historically, however, German households are asking "Haven't
we seen this before, in 1923...?"

Already scared by two stock-market crashes and a global property crash in
the last decade alone, "There's an entire generation of [Western] investors
who may not want to trust governments or mainstream financial products," agreed
Natixis bank's head of precious metals (and LBMA vice-chairman)
David Gornall on Tuesday morning. At several points during the global financial
crisis, "The US Mint has been right at the limit of immediate physical supply," he
noted, but that frenzy has since died down - even as the gold price has continued
to rise. Together, that's created a very un-bubblicious atmosphere on the trading
floor.

"When the gold price broke
new all-time highs [in early Sept.]," reported Steve Branton-Speak of Goldman
Sachs, "volatility [in daily prices, measured on a rolling one-month basis]
was at a 5-year low. When it then went through $1300, traders just shrugged
and said 'So, did you watch the game last night?'

"Compare that to the frenzy of gold trading we got when Bear Stearns and then
Lehman Brothers failed," said Branton-Speak, a point confirmed by both Gerry
Schubert of ABN Amro (who restated the "lack of frantic activity or volume")
and several of the traders I spoke to between presentations (and also in the
bar of course). "What looks like a massive boom in demand is actually very
small... relatively insignificant," confirmed Jeremy East of Standard Chartered
Bank, but gold keeps making headlines because it "punches above its weight
in terms of significance."

Asked whether gold is now a bubble, East opted instead for "new paradigm
- which is in fact a return to the old paradigm." Concurring with Shayne McGuire's
presentation on pension-fund holdings, Standard Chartered's head of metals
sees gold investment holdings only now starting to recover from the wipe-out
caused by two decades of strong interest rates and economic growth between
1980 and 2000. This view, of gold not so much soaring to untold heights as
simply returning to its former position as a key asset class ("Back to the
future" as one oddly aggressive guy put it to me in the smoking lounge) might
seem to downplay its gains. But consider why gold's not always valued, said
Graham Birch, former head of natural resources at Blackrock:

"You don't need gold when...

Inflation is dead

Governments are benign

Taxes are low

Currencies are solid

Markets are booming..."

In other words, said Birch, "Nobody wants gold if market returns are high
and don't seem risky." Whereas today?

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the
secure, low-cost gold and silver exchange for private investors. It enables
you to buy and sell professional-grade bullion at live prices online, storing
your physical property in market-accredited, non-bank vaults in London, New
York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
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BullionVault is a
full member of professional trade body the London Bullion Market Association
(LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious
Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development
body the World Gold Council (www.gold.org)
joined with the internet and technology fund Augmentum Capital, which is backed
by the London listed Rothschild Investment Trust (RIT Capital Partners), in
making an $18.8 million (£12.5m) investment in the business.

Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.